ESG: Data and disclosure

Mary Porter Peschka, Director, ESG Advice and Solutions at the World Bank Group’s International Finance Corporation (IFC), provides an expert’s perspective on ESG, emerging markets and the development community...

As published in the October 2020 edition of the OPEC Fund Quarterly.

OPEC Fund Quarterly: What are the main ESG-related challenges and opportunities of investing in emerging markets?

Mary Porter Peschka: As the groundswell for ESG continues, two fundamental challenges need to be addressed to open the door to investment: access to usable, standardized ESG data; and consistency in disclosure of material ESG and sustainability issues. Data and disclosure go hand in hand.

The United Nations Conference on Trade and Development (UNCTAD) recently reported  that sustainable financing is struggling to find its way to investments in developing countries due to perceptions of heightened ESG risk, even though funds dedicated to investment in sustainability have reached US$1.3 trillion globally. The lack of ESG information in emerging economies is a key factor preventing private capital from reaching these markets. Without reliable ESG data, investors cannot see how ESG risks are managed – or where untapped opportunities lie. To put it simply: transparency builds investor confidence and drives opportunity.

At IFC, we’ve identified a critical issue: there is no one acceptable framework for ESG disclosure. To address this, we developed IFC’s Disclosure and Transparency Toolkit that streamlines current reporting frameworks and provides a step-by-step approach on ESG disclosure and transparency for emerging markets. We also introduced a disclosure and transparency support program for emerging economies, where we work with investors, regulators, companies and in some cases, market intermediaries, to provide more comparable and consistent ESG disclosure. With these tools and resources, our goal is to help encourage adoption of strong industry practices related to ESG disclosure.

OFQ: What is the role of the development community in driving ESG adoption and communicating its importance?

MPP: At IFC, our focus is demonstrating the value of robust ESG leadership practices based on real world investor experience and making critical connections that drive ESG standards market adoption. We have been working in the ESG space for over a quarter of a century, with our initial work centered on incorporating lessons learned from environmental reviews of each investment. We pioneered early concepts around ESG safeguards, and later developed industry-recognized standards. Today, IFC’s Environmental & Social Performance Standards and Corporate Governance Methodology are global benchmarks widely adopted by other development financial institutions, stock exchanges and regulators, export credit agencies, and other emerging market investors. We know that strong ESG standards can help deliver development impact: IFC’s ESG standards help address 16 of the 17 Sustainable Development Goals (SDGs).

To mobilize the US$2.5 trillion in funds per year to reach the SDGs, we need deep, efficient and transparent global capital markets with offerings that speak to investors in sustainable products. This a multitude of players. Global market regulators need to take steps to encourage sustainable finance and strengthen ESG practices, disclosure and transparency. Stock exchanges and regulators must produce ESG disclosure rules that meet local and international best practices. Companies that have better practices will gain better access to debt and equity financing, which can ultimately contribute to meeting the SDGs.

IFC is collaborating with the United Nations Sustainable Stock Exchanges Initiative (UN SSE) to assist stock exchanges in emerging markets to develop better ESG disclosure regulation and we have seen some early promising results – several countries have launched national ESG reporting guidelines, using our tools. Among them are Kenya, Rwanda, Peru, Georgia, the Philippines, Iraq and Kazakhstan.

OFQ: How does an event such as the current pandemic affect ESG-ratings and capabilities?

MPP: Regarding ESG ratings, their use had been increasing exponentially before the COVID-19 pandemic. It’s far from slowed, and has arguably increased, with numerous initiatives launched in recent months. For example, the Institutional Shareholder Services group of companies (ISS) launched an ESG Fund Ratings in August this year to rank global funds by their ESG characteristics and performance. Similarly, Morningstar launched an ESG Screener to compare funds according to ESG policies and financial performance based on its sustainability rating. The rating ranks funds and Exchange Traded Funds by the ESG ratings of their portfolios using data from its Sustainalytics unit, which also expanded its publicly available corporate ESG ratings  to more issuers in July. In September, the International Federation of Accountants issued a statement calling for a new sustainability standards board alongside the International Accounting Standards Board, which promulgates International Financial Reporting Standards to improve ESG reporting.

Regarding ESG capabilities, just as we individuals have each faced unchartered territory in our daily lives due to the pandemic, the same is true for businesses. After managing the impacts of the initial lockdowns, companies have quickly turned their attention to longer-term measures to operate in a ‘new normal’, which requires shifting strategies and approaches to remain viable. Companies have needed to look beyond shareholders and consider their stakeholders. They had to deliver value, namely to their customers; build on the capacities of their employees; deal fairly with suppliers and other business partners; support local communities in which they work; and protect the environment. Research has shown, even pre-COVID, companies that adopt stakeholder-oriented approaches deliver stronger financial performance, especially during times of crisis.

IFC is committed to helping companies improve their ESG and become more investable. In addition to fast tracking support to private companies as part of our pandemic response, we have issued specific ESG COVID-19 advice for companies to utilize in these difficult times. With this assistance, we hope to see long-term what we have seen initially: companies with better ESG practices will be more resilient for this and future crises.